ATN International Inc (ATNI) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Atlantic Tele-Network second-quarter earnings conference call and webcast. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Justin Benincasa, Chief Financial Officer. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thank you for joining us on our call to review our second-quarter results. As usual, with me here is Michael Prior, ATN's President and Chief Executive Officer. During the call, I'll covering the relevant financial information and some of the operational data, and Michael will be providing an update on the business.

Before I turn the call over to Michael for his comments, I'd like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results and are subject to risks and uncertainties that could cause the actual results to differ materially from those described.

Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details of these measures and reconciliation to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at ATNI.com or to the 8-K filing provided to the SEC.

And with that, I'd like [technical difficulty - audio lost].

(Operator Instructions). I would now like to turn the call back over to Mr. Justin Benincasa, Chief Financial Officer.

We apologize for that, I think something happened in the connection to the line. So I think what we're going to do is, unfortunately I'm going to bore you one more time with the intro and the cautionary safe harbor stuff and then turn it back over to Michael. We'll just start over again, folks. So sorry for those hanging on.

So before I turn the call over to Michael, again, I'd like to point out that this call and our press release contain forward-looking statements concerning our current expectations, objectives, and underlying assumptions regarding our future operating results and are subject to risks and uncertainties that could cause the actual results to differ materially from those described.

Also, in an effort to provide useful information to investors, our comments today include non-GAAP financial measures. For details of these measures and reconciliations to comparable GAAP measures and for further information regarding the factors that may affect our future operating results, please refer to our earnings release on our website at ATNI.com or to the 8-K filing provided to the SEC.

And with that said twice, I'll now turn it back to Michael.

All right, thank you, Justin. I wish you all could have heard it the first time, it was awesome. But I will try to make it fresh the second time. So first of all, the overall view of the quarter, it was clearly a very profitable quarter. It continues many of the positive trends we saw in the first quarter and those include strong profitability and cash flows for our largest segment, US Wireless, a stabilized US Wireless subscriber base, and improved profitability and subscriber growth in the Island wireless piece of our international operations.

Turning to the details, first I'll start with US Wireless retail as usual. To reiterate my comments in the press release, we were certainly pleased to see net adds of nearly 5,000 for the quarter. Our team did a great job selling our value proposition in an historically weak quarter for retail sales. In particular, prepaid sales, which really are typically weakest in the industry in the second and third quarters, were quite strong for us. And we see this largely as a result of our opening up a significant new big box distribution channel.

Of course as noted in our release, it will be difficult to repeat the subscriber performance in the third quarter for two reasons. First, the third quarter is, as mentioned many times, is often the worst quarter for retail sales in this industry. And second, we will experience a higher percentage of contract expirations in the coming quarters as a result of the large amount of upgrades started about two years ago to deal with the one-year contract bubble we inherited.

On the gross addition side, we added a little over 55,000 subs. That's up from about 39,000 a year ago and that's about even with the first quarter. Prepaid gross adds were about 32,000 of this, more than 125% higher than the second quarter last year and down only slightly off of the seasonally strong first quarter.

This substantial increase in prepaid sales year on year was due to the launch of our Best Value plans in late 2011, expanded distribution, particularly the big box channel we referenced, and increased lifeline sales.

On a sequential basis, normally we would see a decline from the first to second quarter in prepaid. Instead, it was essentially level, reflecting our expanded distribution which was launched in May.

Postpaid gross adds were about 23,500 which is down 5% year on year, but it's up 5% on a consecutive quarter basis. Despite the improvement, this continues to be a challenging area for us. We feel strongly that our value proposition is compelling and we'll continue to experiment with different marketing strategies to drive, to try to drive higher sales. The positive response to our value proposition has occurred more quickly on the non contract pre [technical difficulty - audio lost].

(Operator Instructions). I would now like to turn the call back over to Mr. Justin Benincasa. Sir, you may begin.

Actually it's Michael Prior. All right, sorry, everybody, about this. Something is wrong with our office line, so since we're mostly in the wireless industry, we're dialing in like a cell phone, on a cell phone. So I'm told that we got through gross adds and I'm going to start back with customer churn. We may have covered some of that, but I'm going to turn to that now.

So with respect to customer churn, postpaid subscriber churn improved both year on year from 2.42% to 2.28% and on a consecutive quarter basis from 2.41% to 2.18%. Blended subscriber churn showed similarly positive gains from 3.73% a year ago to 2.9% this quarter. This marks a significant improvement in churn, but as discussed, an increase in contract expirations as we work through the one-year contract bubble will likely put upward pressure on this number going forward, as other factors.

Overall subscriber ARPU went in the other direction from $49.36 in the prior quarter to $47.63 for this quarter. As we mentioned last quarter, the first quarter had some amount of EPC pickup, so this was not unexpected. Postpaid ARPU was essentially flat, $53.96 for this quarter compared to $54.15 in the first quarter. In addition to the EPC pickup, the decline in overall subscriber is largely the result of an increase in our prepaid subscribers which carry a lower ARPU than average postpaid subscribers.

Going forward, the general dynamic on ARPU we are seeing is a continued decline in voice usage which has been offset by increases in the take-up of data services. We also see some degradation in ARPU from longtime customers who migrate down to newer and less expensive plans.

On Smartphone adoption, we ended the quarter with about 38% of our postpaid base on Smartphones. About 55% of total postpaid device sales in the quarter were Smartphones, and both metrics are consistent with the first quarter. However, they are below what we've seen in some of our peers and we are launching a number of new smart devices late this summer and early fall and we'll continue to prioritize improving our Smartphone and data device lineup to stimulate additional gross adds as well as higher adoption of data services. If we are successful, ARPU should start to climb.

On the wholesale US Wireless front, turning to that now, the revenues were more or less flat from a year ago. However, the mix continues to change. In many areas we have seen actual declines in voice traffic, but that has largely been offset by an increase in data volumes. Looking forward, we do not expect to see the same level of seasonal increase from second to third quarter we saw last year due primarily to some over building activity by customers.

In our international operations, international wireless revenues were up nicely and this is of course primarily due to the Bermuda merger which occurred partway through the quarter last year. However, we also saw strong subscriber growth in our smaller island properties, offsetting some integration related declines in Bermuda. Many of our managers have introduced very creative marketing and sales initiatives and we hope to see subscriber growth in this areas sustained in coming quarters.

In Guyana, profits were down for the quarter, but we expect to see a rebound as this was caused mainly by higher marketing and promotion expenses in the second quarter. And it was also caused by, if you've noticed, we had an uptick of wireless subscribers. Actually the first quarter sequential growth in the year with an increase of 4% over the first quarter. And any time you have a little bit of a surge of subscriber growth, equipment expense also goes up and other sales fees.

So in summary -- are we off again? So this is not our phone line. Okay. You got it? Okay, I'm told some people are saying we're off, some people are saying we're on, so I'm going to continue while they try to figure it out.

To summarize, as I said, this was a solid quarter with strong profit and cash flow performance. Those of you who've followed ATN for some time now that we've never been market share or top line driven. Rather, our long term strategy has been predicated on driving profitability and using operating cash flow to invest in promising areas within our existing businesses and elsewhere -- and to elsewhere build returns for shareholders.

Our first half 2012 results are indicative of the strength of our current asset portfolio. So although I'm fearful doing this, given all these problems, I will hand this over to Justin who will give you some more financial and operational details.

Thank you, Michael. Interesting, we're in the telecom business, but --. Revenues for the quarter totaled $185.3 million which was a decrease of $8.5 million or 4% from the same quarter in 2011. Consistent with last quarter, this resulted primarily from a decline in the US Wireless retail revenues due to subscriber attrition in 2011, which was partially offset by an increase in our international wireless revenues.

Total wireless revenues for the quarter were $155.9 million, or 84% of total revenues, and our US Wireless service revenues were $135.6 million, or 73% of total revenues.

Adjusted EBITDA was $49.7 million, up $17.7 million or 55% over the same period last year. Included in this quarter's operating expense of $162.2 million was non-cash stock-based compensation expense of $0.8 million. Our US Wireless segment accounted for 85% of adjusted EBITDA and 73% of operating expenses.

Moving down to net income, earnings for the quarter were $10.5 million or $0.68 per share, compared to $1.8 million or $0.12 per share reported in the second quarter of last year. Our effective tax rate for the quarter was 40% compared to 44% a year ago, reflecting a change in the mix of income between our various tax jurisdictions.

Turning to the balance sheet, as of June 30 we had cash balances of almost $80 million and total debt outstanding of $280 million, which leaves us with a leverage multiple of approximately 1.5 times and 1 times on a net debt basis. Net cash provided by operating activities was $58.6 million in the quarter which included an $11.5 million tax refund from an NOL carry back.

Capital expenditures totaled $13.2 million for the quarter and $32.3 million year to date. For the quarter, approximately $7.9 million was incurred by our US Wireless segment and $1.6 million by our international telephony segment. For full year 2012 we lowered our forecast for capital expenditures to be between $80 million and $95 million. This is primarily a result of a delay in certain capital projects which have shifted some of our forecasted expenditures to 2013. Of the $80 million to $95 million forecast, the US Wireless segment is expected to account for $45 million to $55 million.

Some additional operational data for the quarter, we ended the quarter with 784 roam-only base stations. In the wholesale businesses, MOUs were up 5% from last quarter but down 19% from Q2 of last year. Data traffic was up 20% from first quarter and 9% from the same period last year.

In international wireless, we ended the quarter with a total of approximately 325,000 subscribers, of which 287,000 were prepaid. In our US Wireless segment, business lines increased 16% from a year ago and 8% from the first quarter, ending the quarter at approximately 63,000 lines. Internationally, access lines remained relatively flat at approximately 150,000 access lines.

And with that, I'm going to take my chances and throw it back to the Operator and see how this goes. So Operator, if you're there, we're ready for questions.

(Operator Instructions) Ric Prentiss, Raymond James.

First question on the margin side, pleasantly surprised, particularly in the US and in the Islands area. It looked like service margins for US Wireless were above 30%. What are your thoughts as far as where that could head? I know you said seasonally 2Q might not, or 3Q might not be as strong versus 2Q in the wholesale high margin business, but just trying to think over the medium and long term, where are margins going to be settling out?

Well I can take a stab at that. I think this quarter is likely to be at the high end of what we believe is kind of a sustainable range with quarters like the fourth quarter being probably amongst the lowest. Obviously the gross adds and handset subsidies as well as any fluctuations in the wholesale will further impact that though.

And then in the Islands, pretty dramatic improvement there. You pointed to Bermuda, also some adds in some of the other islands. Can you update us as far as what the trend line looks like for margins and EBITDA levels kind of coming from the islands?

Yeah, I'm not sure we predict a trend at this point, but I think what you're seeing there is the Bermuda synergies from the merger. That is really most of the impact and we think we've really captured the main synergies and significant synergies. So what could drive it, what could improve margins from here is really growth, top line growth and subscriber growth, in some of the smaller lines. And I think over time that definitely has the potential to push those margins up, but it'll be slow I suspect from an overall basis.

This level we saw in 2Q is kind of a new stable area?

Yes, I think we expect it. There is some seasonality because of the ups and downs of the roaming side, but think it's pretty close.

And that area is a little more kind of in the winter -- it's not the US, is it, trend of roaming is higher in 2 and 3Q? Bermuda presumably is a little higher holiday time and winter time?

No, actually it's a mix. So Bermuda is highest from middle of spring through fall because it's not that warm in the winter and the Caribbean properties are the reverse. And they're all relatively weak from a tourist visit level in the middle of the fall. That's -- maybe Bermuda is the strongest there.

When they wear their Bermuda shorts. And then final question and I'll circle back in if there's time, what percent of your base upgraded in the quarter? We're seen an industry trend this quarter where it seemed light as far as what percent of postpaid customers upgraded. And maybe if you could give us, if you have those numbers, a little history over like the last several quarters?

Yeah, I don't have those at hand, but we'll look and see and if we want to do something, we'll get back on this call to that. But maybe we'll take the next question, unless you have another one, Ric.

I'll come back in afterwards.

Barry McCarver, Stephens.

Good morning, guys. I recall years ago that the Wal-Mart relationship I believe was the single biggest driver for prepaid for Alltel back in the day. Now that you're back in that relationship, can you give us a little more color on what it did for you in the quarter? And would you -- is that kind of fully ramped up or is there kind of more to come in the next couple of quarters?

Yeah, well without giving precise numbers, it's not fully ramped up because it was not a full quarter of Wal-Mart. Although you, when you initially launch anywhere there's a little added excitement and sort of a boost. So it could go up from here, but we're not predicting something dramatic at this point. But we're very pleased. We're happy and I think they're happy.

Okay, and then in terms of you talked a little bit about churn and what it could look like next quarter. Can you give us an idea of the magnitude of the base of subscribers that's coming up for renewal in 3Q? Just trying to get our hands around kind of what the bookends of churn could look like going forward.

Well without giving a number, Barry, I think that what we're talking about is we had that initial situation where we were dealing with high, very high contract expirations. And in addressing that and renewing people, as well as new adds and getting them on two year contracts, we kind of created a receding wave. So the impact shouldn't be as significant as it was the first time around and it will be less so two years from now. But we'll be a little off of a real steady state mix of contract expirations for a little while. So that's -- I'm not going to try to predict a precise number because there's a number of factors as you know that impact churn.

Okay. And then just lastly, any update on kind of your outlook or appetite for additional acquisitions or maybe spectrum purchases?

Yeah, so let me take the first first. We always have an appetite for acquisitions. It certainly is more muted when we're dealing with integration and transition and we're through all that. And we also are careful on our balance sheet. But we have a pretty rapidly de-levering situation, a strong balance sheet, so if the opportunities are there that meet all of our parameters, we'll look at them. And that's really always going to be the case.

As far as spectrum, yeah, we look at that and we always -- spectrum is strategic and as data grows, it's more and more valuable in order to expand your operations. So we do look at that. We haven't made any significant purchases because we also have to be realistic about pricing.

Okay, that's very helpful. Thanks a lot, guys.

Hamed Khorsand, BWS Financial.

Good morning, guys. A couple of questions for you. First, talking about the US retail business on the subscriber side, can you talk about what you can do to counter some of these losses? I mean, are you expecting any subscribers to go off your network purely because they're disgruntled or they don't like your phone choices? Can you just talk about that a little bit?

You're talking about, Hamed, I want to make sure I understand your question. Are you talking about the disconnects we had in the month in any given time on the postpaid side? Is that your question or generally?

No, I'm talking about generally regarding Q3 and your commentary about expecting a roll off in subscribers. I just want to see how you want to counter that.

No, I think -- look, I think industry wide the churn is highest amongst people coming off contract. That's just a fact of life for every carrier that I'm aware of in any situation. So it's not a reflection of the fact that we think there's a weak value proposition, it's just historically been the case. It's not a huge percentage, but it's significant enough to note that when people are coming to the end of contract, coming off contract, they switch at a higher rate than certainly people on contract of course and also people who have been off contract for a long period. So that's just statistics we've always seen. I think almost everyone in the industry has seen. So if you see the contract expirations are going up, you'd expect your disconnects to go up.

I understand, I was asking more about what the game plan is so you can counter that loss.

Well we do everything we normally do, plus. So you make sure your value proposition is very fresh. Everything from the quality of your services, the quality of your customer care, your pricing, and your devices. And you look at all those things. The buttons you can push most quickly to deal with these things tend to be in devices, promotions and other sales tools. I think we have a strong offering for customers, so it's getting that message to them. And I think if we have any weakness, we're, like all of the regional carriers, we're weaker than the large ones on devices.

Okay. My other question was on the US roaming side. I thought the carrier losses had already worked through your numbers. Could you just comment on how Q3 will be no growth from a seasonal standpoint?

Yeah, I didn't say no growth, so let me clarify that if that was the takeaway. I don't think we'll see growth at the same level. It could be flattish, it could be up a little. It's a little hard to predict roaming. There are movements that are hard to predict. The reason we're saying that is there's been some areas that have seen some overbuild activity and we're just looking at the trends and saying it's probably not going to have the uptick it did last year.

Okay. Are you putting any CapEx behind that business longer or expanding how many base stations you have?

We're not doing any significant base station comparison. They're small things and they are always upgrades, capacity, technology, and that sort of thing. But there's nothing significant.

Okay, thank you.

Operator, before we go to the next question, just to answer the question we had before from Raymond James, the Smartphone percentage of postpaid upgrades was 59% in the second quarter. With that, let's just go to the next question.

Chris King, Stifel Nicolaus.

Good morning, thanks for taking the question. Two kind of minor ones I guess in the grand scheme of things. But I just wanted to double-check on the termination and access fee line item which took a nice step down sequentially. Just wondering if there was any kind of rate reduction in there we should be thinking about from a one time perspective or a usage slowdown that would have impacted that number a little bit.

And then second question was, just wanted to get an update, I know you guys have been in the news a little bit in Guyana from the international long distance monopoly there and DigiCell challenging that based on the forward ruling. Just kind of wanted to get your latest thoughts on that process and where that stands.

Sure, on the first question, the decline in termination of access fees is really the result of a lot of good work on the US Wireless side. We've gone out -- one of the areas we've addressed looking at going into this year to improve margins were our backhaul costs, really. So we went after that and we're still going after that. So it's not a onetime thing. I don't know how much room for improvement there is left, because as an opposing factor, you have growth and capacity needs from data growth. But we think that's a cost savings we've captured that will stay.

And on the Guyana side, yeah, just for everybody's benefit if they haven't followed the news, we had a lower court case involving ISP result in a ruling that said our exclusive right in international was not valid. We sought and got a stay of any effect of the decision pending appeal. We disagree strongly with the reasoning behind the decision and we feel good about our chances on appeal.

But in the meantime, as soon as this happened, our competitor down there, the wireless competitor DigiCell, launched international services immediately without an international license, without getting their rates approved by the Public Utilities Commission which is required in Guyana. And both we and the government reached out to stop that, which they did. So there was a matter of a few days between one and the other.

Press reports are interesting, because they report that they were offering reduced prices and we stopped them. In fact, I think the prices were reduced to places that people barely ever call and they were in fact higher to places people call most like parts of North America. So we think it was just a gambit by our competitor. And we still are in the same position we've always been in we talk over and over about which is that we have been waiting to work with the government towards a new regulatory scheme which would include the end of our exclusivity. And we're sincere in saying that and we're waiting to have that happen.

Thank you.

(Operator Instructions). Ric Prentiss, Raymond James.

Thanks, a couple of follow-up questions. First, Michael, you were talking about backhaul costs. Can you update us as far as what percent of your US wireless business, retail side, has fiber backhaul to the cell sites? Do you know?

No, I don't know, I don't know it off the top of my head. But it's one of those things we're looking at in preparing at some point to go to 4G. So that's one of the things that you have to look at. And you have to look at it even if you don't go 4G, but even to really capture the benefits of something like LTE, you really have to go to an Ethernet backhaul approach. So there's -- I think we have a lot to do still on that, but I don't know the percentage. And by the way, as fiber -- microwave can deliver that for you. As you know.

That leads naturally to the next question which is, can you give us an update on your thoughts on LTE? It's quite prevalent in the advertising in the major markets. We're expecting the iPhone 5 to come out in the fall with LTE probably creating even more buzz. What's the competitive situation as far as LTE in your markets from the competitors and what are your thoughts about when you need to deploy it, times to deploy it, costs, kind of the whole LTE update?

Sure. I think we think we will need to deploy LTE. We think -- we haven't made a commitment, but we think we will start to deploy in areas sometime in 2013. Standing here today that would be my prediction. And that's part of why our CapEx number is lower for the year, because we don't see significant expenditures on that this year. And I think our competitor, our main competitor, is bringing LTE in some of the areas, has already. That's Verizon. And I think it will continue. So I think we'll continue to be competing in more and more areas with an LTE offering, so that is important. We want to be fully competitive there. And also, when we look at the cost of adding capacity, 3G capacity at some level, it's not much more costly to go to LTE. So that's another driver in looking very seriously at it.

Is it the thought that it will probably be a multiyear project? Should we think about $10 per covered pop kind of a ballpark number, as a placeholder over the build period?

I think over a long period of time it might be higher because you've got, if you really figure in all the costs including, as we talked about, Ethernet backhaul, some IT things, I think it could be north of that, but I think it will be over an extended period. I mean I think there are areas where we would come later. And so it would be over a period of time.

The final kind of interrelated question is, Intelos, one of the other regional operators, reported numbers and actually had quite a large amount of iPhone sales. What are your thoughts on does the iPhone make sense in your markets? Is it hurting you on the postpaid churn and share of adds? Just kind of as you think through the iPhone phenomenon, given that we probably will see a new iPhone refresh in the fall with LTE?

Yeah, I think it is probably hurting us. I'm sure it's hurting us on the postpaid side. It's -- anytime you don't have a device a lot of people want, and certainly that's true of the iPhone without stating the obvious, then you're hurting yourself a little bit or more. And so we are, without speaking to any specific device, we're continually looking at that. We're looking at how we can have a very strong device lineup and limit the amount of people we lose for that reason. And also improve the amount of people we go on and get for that reason.

So I think we've got some -- it's improving even this quarter, our device lineup. But we don't have the iPhone, so that is a weakness.

I would expect as they continue to bring out new iterations of the iPhone, the older iterations become less expensive to the carriers and yet some customers might be happy with a 4 or a 4S even as a 5 comes out.

I think that's a consideration. I think you've -- I don't know enough yet because I don't know what the 5 will look like and what the consumer reaction will be, but if you look at what's happened in the last few generations, that's often been the case.

Great. Thanks.

And I'm not showing any further questions at this time. I'd like to turn the call back to management for closing remarks.

Okay, well I don't have any closing remarks, I'm just glad the phone line stayed up for a few minutes at the end. I thank you all for your patience and we'll talk to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.